AOL, Firms Explore an Offer for Yahoo

By

Jessica E. Vascellaro And

Anupreeta Das

Updated Oct. 13, 2010 12:01 a.m. ET

AOL Inc. and several private-equity firms are exploring making an offer to buy Yahoo Inc.,YHOO-2.00% according to people familiar with the matter, devising a bold plan to marry two big Internet brands facing steep challenges.

AOL and private-equity firms are exploring a bid for Yahoo, devising plans to marry two big Internet brands that both face steep challenges. The discussions are preliminary and don't include Yahoo. Jessica Vascellaro discusses. Also, John McKinnon discusses the Estate Tax as it grows as a hot-button election issue.

Silver Lake Partners and Blackstone GroupBX-0.10% LP are among the firms that have expressed interest in teaming up with AOL to buy Yahoo or trying to take it private on their own, these people said. They added that at least two or three other firms could be interested in participating if a formal buyout proposal is drawn up.

The people familiar with the matter cautioned that these discussions—involving private-equity firms, AOL executives and financial advisers—are preliminary and don't yet involve Yahoo. The conversations may not lead to an approach given the complexities in structuring a proposal, the people said.

Spokeswomen for Yahoo and AOL declined to comment.

Yahoo has asked its banker Goldman Sachs about the rumors, verify whether they are credible and if there is an approach, what steps to follow, a person familiar with the matter said. The person characterized these discussions as routine in response to market speculation.

Yahoo has a long-standing relationship with Goldman, which advised it on Yahoo's takeover defense against Microsoft Corp. in 2008.

AOL, which spun off from Time Warner Inc.TWX-0.45% in late 2009, currently has a market capitalization of $2.68 billion, far smaller than Yahoo's $20.56 billion market value.

Shares of Yahoo on Thursday afternoon were up 4.3%, or 65 cents, to $15.90, after having spiked up further in the morning, following an unusual day of trading Wednesday.

On Wednesday, the shares rose 5.7% to $15.25 at 4 p.m. on the Nasdaq Stock Market. Some 49.6 million Yahoo shares changed hands on Wednesday considerably higher than the average of 17 million shares a day so far this month. It was one of the best-performing tech stocks of the day.

One of the scenarios under discussion among the buyout firms is a complex deal in which China's Alibaba Group would buy back Yahoo's roughly 40% stake in Alibaba, the people said. Some of Yahoo's other assets would also be sold off to interested media or technology firms, and the remaining company would be of a much smaller valuation that private-equity firms could get financing for, one of the people said.

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Another scenario involves AOL combining its operations with Yahoo in a reverse merger after Yahoo disposes of the Alibaba stake, the people said. It is unclear if the resulting entity would be listed publicly.

Alibaba Chief Executive Jack Ma has expressed interest in repurchasing Yahoo's stake in his company, which analysts value at about $10 billion. A big chunk of Yahoo's current market value comes from its Alibaba stake.

Separately, AOL Chief Executive Tim Armstrong has also talked privately about the idea that Yahoo could buy AOL, according to a person familiar with the matter. Another person familiar with the matter said private-equity firms may also look to partner with media companies to buy Yahoo.

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A combined Yahoo-AOL would have greater scale to compete in online advertising against industry juggernaut Google Inc. While both companies draw huge amounts of users, their advertising businesses have struggled as they've faced competition from a range of websites. The scenarios being discussed are similar to ones financial firms have discussed before. Yahoo and AOL discussed a merger in 2008, as Yahoo weighed a $45 billion takeover offer from Microsoft Corp.MSFT-0.38% Microsoft eventually pulled its bid.

While private-equity firms have long contemplated a deal for Yahoo, talks have heated up in recent weeks as several senior Yahoo employees have left the company, intensifying pressure on Yahoo Chief Executive Carol Bartz to prove she can turn the company around, the people familiar with the matter said.

Ms. Bartz has improved Yahoo's profitability by cutting costs, but revenue hasn't grown much and the company faces other problems. The Internet pioneer, for example, has shown fewer benefits than competitors from a broad recovery in display advertising—an area where it faces increasing competition from Google and Facebook Inc.

The company, which reports third-quarter earnings next week, claims that more than 600 million people use its home page, email service or other sites every month. But the number of Yahoo pages viewed by its users, known as "user engagement," began shrinking in the second quarter. Yahoo also has seen a drop in the value of advertising against content that Yahoo pulls from other sources. Ms. Bartz said in a recent interview she needed more time to pull off a turnaround.

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